Market hits pensions

Philip Fine | Pension funds are among the assets of Canadian universities to have been hardest hit by the downturn in the stock market. While McGill's fund weakened slightly, its credit rating has remained stable. Nonetheless, the damage the stock market left on two of its confreres did make some recent headlines.

Standard & Poor's (S&P) cut the University of Toronto's credit rating from the coveted AA+ to AA. The rating, which had been shared with only one other Canadian school, Queen's University, was lowered due to a weakened stock market and pension fund worries. McGill's S&P credit rating is an AA-.

S&P's analysis said U of T's problem lay in its financial asset weakness, characterized by a rising operating deficit, a recent $200 debt issuance and a pension fund that fell from an $86 million surplus to a deficit of $398 million.

"The reversal from a net creditor to a net debtor is one of the key factors contributing to the ratings action," the analysts wrote, adding that the cause of the pension erosion was the weakened financial market of the past few years.

Despite this, S&P said, U of T is actually in good shape, with diverse revenue sources, a strong and growing research capability, fundraising and significant endowment income. "It's still a tremendously high rating," said S&P's Paul Calder, who contributed to the ratings analysis.

U of T responded to the downgrade by saying that it will cut its budget by 4.5 percent this year. Its pension fund does seem to be on the rebound, delivering a return of 7 percent so far in 2003.

McGill received its credit ratings last fall, just before floating a $150 million debt issuance. Aside from the S&P rating, it was also given one from Moody's Investor Service: Aa2, which is two levels above the province of Quebec rating, with the S&P rating one level above the province. McGill's Director of Finance and Investments John Limeburner says this acknowledges McGill's strengths on both a financial and academic level.

Concordia University, like many Canadian universities, is in the throes of some intense construction and is just as dependent on a fickle stock market. It received an A1 rating from Moody's on its $225 million debt, equal to the rating of the province of Quebec. Other universities that have Moody's credit rating equal to the rating of their host provinces are the Universities of British Columbia and Ottawa.

Université de Montréal has never sought a credit rating but the university's pension fund did experience a more tangible financial loss this past summer. It learned in July that a hedge fund in which it had sunk nearly $100 million of pension money was caught in a criminal investigation by the Securities and Exchange Commission (SEC). The SEC accused Lancer Offshore and high-profile analyst Michael Lauer of manipulating stock and deceiving investors. The SEC laid fraud charges and froze the fund.

U de M has joined the many lawsuits launched against the investment company but faces a possible $100 million loss.

The university is assuring its pension fund members that its recent bad luck will not take it off its financial course "Despite uncertainty over the real value of the Lancer investments, the (university) pension fund's financial situation will remain stable and the fund will continue to assume all its obligations," U de M officials told fund members.

Limeburner acknowledges that Canadian universities went through a couple of years of seeing a weak stock market, but sees reason for optimism in recent figures. He says that while the weak financial markets experienced from 2002 to the end of the first quarter of 2003 did result in a negative return of 4.9 percent for McGill, the return for the six months ending June 30, 2003, was slightly over 3 percent and it has continued to improve as markets have rebounded. "Too much has been focused on these last two years," said Limeburner.

The association representing Canadian university financial administrators echoes that sentiment. Laura Kennedy, an executive member of the Canadian Association of University Business Officers, says those two bad years will not change the way the country's universities conduct their investment planning. Kennedy, who is also associate vice-president for financial services at the University of Saskatchewan, said weak returns have not put Canadian universities off the stock market. "In general, universities are still holding to a diversified portfolio. It's a widely held belief that it's the best way to go in terms of long-term investment."

Philip Fine is the Canadian correspondent for Britain's Times Higher Education Supplement.